Sony & Panasonic: Out of the Woods?

MADISON, Wis. — Are Japanese consumer electronics companies on the mend? Is the worst over? Considering that the Japanese yen worked as a major tailwind for many Japanese companies in the last quarter, it's probably still too early to declare the Japanese consumer electronics industry's full recovery.

Meanwhile, a more pressing question the financial community keeps asking is how soon Japanese electronics giants such as Sony and Panasonic will get out of the CE business and turn themselves into something else.

Contrasting full-year financial forecasts issued by the two companies -- Panasonic and Sony -- this week tell an intriguing story that got many financial analysts to suddenly jump on the bandwagon in praising Panasonic, while ditching Sony.

Sony on Thursday, Oct. 31, warned that the company will not meet previous full-year profit targets, after sliding to a net loss of 19.3 billion yen (US$197 million) for July to September. Sony now sees its full-year operating profit falling 26 percent to 170 billion yen ($1.73 billion).

In contrast, Panasonic now expects operating profit to climb 68 percent to 270 billion yen in the fiscal year ending March 31. It sees net profit coming in at 100 billion yen ($1.02 billion), compared with a year-earlier loss of 754.2 billion yen ($7.68 billion).

Panasonic's turnaround is a result of a round of heavy restructuring. The Japanese company pulled out of plasma TVs and smartphones. The company also sold assets, agreeing recently to the sale of 80 percent of its healthcare unit to US buyout firm KKR & Co for 165 billion yen ($1.68 billion).

Meanwhile, Panasonic claims that sales of residential and automotive electronics are growing. The Osaka-based company also announced earlier this week that it would sharply increase its supply of lithium batteries to Tesla to nearly 2 billion cells in the four years to 2017 -- a huge jump from the 200 million cells it is supposed to have provided over the two years to this December.

Many analysts attribute Panasonic's better-than-expected results to the shift in the company's business away from consumer electronics.

In contrast, many analysts blamed Sony's falling profit outlook on its TV business, which is now back in the red. Sony said Thursday that its TV business went back into a 9.3 billion yen ($95 million) operating loss, after the company's TV division showed its first quarterly profit in three years in April-June with a 5.2 billion yen ($53 million) operating profit.

The weak sales of video cameras and personal computers are also hurting Sony. Sony's smartphone business, however, is believed to be holding up in the latest quarter. According to the Japanese company, it still expects to sell 42 million smartphones this fiscal year, unchanged from previous guidance. The company sold 10 million in the three months between July and September.

Meanwhile, Sony is still holding high hopes for its video games business. The company is scheduled to launch new PlayStation 4 game consoles in November.

A popular view of Sony and Panasonic says that those who decisively ditch the TV business sooner would restore the health of their business more quickly.

Richard Windsor, chartered financial analyst and a blogger at Radio Free Mobile, posted Friday a counter-argument, saying Hirai's three-pronged strategy is "absolutely bang-on." But Windsor also noted that "the real question is how long does he have to realize that vision or will impatient shareholders sell the company out from underneath him?"

Windsor described Hirai's vision as "to turn Sony from a lumbering conglomerate into an integrated ecosystem play with both hardware and software." He noted, "This is the right vision but it is incredibly difficult to execute and it will take a long time in the best instance."

Windsor holds the view that with its assets from electronics to media, "Sony is the only Japanese company that has a chance being relevant in the digital ecosystem world."

However, it is true that beyond the company's weak TV, imaging, and PC sales, Sony's second-quarter loss was mainly on its movie business, which posted an operating loss of 17.8 billion yen ($181 million) in the quarter, reversing from a profit of 7.9 billion yen ($80 million) a year earlier. Sony cited disappointing box office performance of some of its films.

While Windsor brushed off the big loss in the movie business as "bad luck," Sony's movie and music businesses will come under scrutiny once again, as hedge-fund investor Daniel Loeb earlier this year called for a spinoff of the entertainment division through an initial public offering.

As for Panasonic, it remains to be seen if its non-consumer electronics business -- automotive, battery, residential, industrial, and others -- will keep growing over the next few years.

Radio Free Mobile's Windsor criticized Panasonic for "cost cutting its way into obscurity." He wrote:

Panasonic is finished in the technology sector and while it may be profitable it will never see greatness again.

This will give some short-term share price performance but in the longer run the company will drift sideways.

I think the problem with the duo of Sony and Panasonic has nothing to do with technology. I think it is marketing. It is the same problem Nokia is having with Lumia. When people see your brand as old, it is hard to change that perception. Take a Sony phone to a party of younger ones, people may think you are coming from the ancient world.

Panasonic and Sony had difficult time. But they always design technically very sound products. I alway appreciate Panasonic and Sony products and purchase when I have an oppotunity. I like Panasonic doing what is correct, success and more profit will follow. I look forward to good days for Panasonic and Sony.

Yog-sothoth, you just summed up what just happened in the consumer electronics industry in the last 40 years in mere three paragraphs. Nicely illustrated.
And yet, I am still struggling to explain why things have turned out the way they are now. It's true that good things never last forever, but for someone who watched this industry closely, how things slipped away from the Japanese CE industry still amazes me.

From the 1970's until maybe the ealy 2000's, Sony seemed to be the leader in innovative consumer products - the Walkman was a groundbreaking product just as the iPhone was. It took existing cassette tape technology from something heavy and boring into something mobile and exciting.

Shift forward 40 years and what is Sony cool for? It's TVs were great 10 years ago but Samsung has taken the lead there. Its mobile phone business is in the also-ran group. It had some quite cool laptops years ago (I always loved my old Vaio with its magnesium case, dare I say it more elegant than my current Mac powerbook with its rather harsh angular aluminium case).

What seems to be hapening is that we have new ground leaders in design (e.g Apple) and clever followers (e.g. Samsung) but the old Japanese order are neither. Sad really.

This story talks about the alternate reality in which the corporate execs live, and which unfortunately affects all of us. Panasonic may well have needed to reinvent themselves, and in my experience, it's really hard to say whether this will work out for them or not.

I once worked for a company that had all of the exciting, leading edge programs. One day, the CEO came to talk to us and said, "Our first priority is the shareholder." Uh oh, shoot, the kiss of death just happened here. Sure enough, all the fun divisions (including mine) got sold, lock, stock, and barrel, to another company, and my former company became one of yawn stuff.

But good yawn stuff. It has been doing great, for shareholders that is, in spite of yawn. You don't see it in fun movies anymore, you don't see cool ads that make you want to work there, but would the top execs care? Heck no. MBA schools teach, "corporations are in business to make a profit." Period. Nothing else matters.